Today’s beer industry is undeniably shifting in favor of the emerging craft brew movement that has brought thousands of options to taps across the nation.
With ever-growing market presence and seemingly limitless business potential, it’s no wonder small-scale brewers are jumping at the opportunity to start their own brewery and get their beer to the market.
Smart Business spoke with Brandon Scripps, a senior audit manager at Sensiba San Filippo LLP, for insight on what critical financial factors lead to the success and failure of startup breweries.
Why would someone want to open a brewery?
As of 2015 there are more than 4,000 breweries in the U.S., that’s up from 3,500 in 2014. While the industry increased less than 1 percent last year, craft beer sales rose nearly 20 percent.
Craft beer has caused big breweries like Budweiser and Miller to decline by more than 25 percent in the last six years.
Craft beer’s growing presence in the $100 billion industry is resulting in a significant amount of acquisitions of craft breweries by some of these larger breweries, with huge associated valuations.
What are the main reasons why new breweries fail?
Failure usually stems from undercapitalization and lack of understanding of the operational aspects of the business. Having a successful brewery is more than the quality of beer you are selling.
It’s having the right financial understanding to keep it afloat. This includes implementing smart branding strategies, planning for distribution, expansion, and impeccable inventory and costs tracking.
Failure to understand these elements has been a major downfall of many breweries.
How can a brewery set themselves up for success?
A good, realistic business plan is critical. In order to make a profit you must know how much money goes into your beer and how much you get out.
Careful cost tracking will help you identify exactly what you need to sell in order to be profitable, which will in turn tell you which product is successful and if you need to raise prices, up production or reevaluate your vendor budget.
You must understand the key financial ratios, such as breakeven point, matching production runs with projected sales, and the costs and margins of different products.
Additionally, a good inventory tracker may be a hefty investment, but it’s a crucial expense if you plan on growing and keeping your label alive. Before starting, factor in extended time for licensing and permits since that could affect your market schedule.
What is the best advice you could offer someone opening a brewery?
Understanding the financial ratios of your business and looking at information in real time is a must.
There are three statements that are essential: your income statement, your balance sheet and your cash flow statement. Looking at only one of these will lead you to false assumptions or even a skewed idea of how well, or poorly, your business is doing.
Your income statement showcases your profit margin and ultimately shows efficiency over time. Because it shows income, owners often mistake this as the only piece of the puzzle they need to assess their success.
However, you need all three statements to gain a complete picture. The balance sheet is a snapshot of your business at a single moment in time and is important when looking at ratio calculators and key performance indicators.
Lastly and arguably most importantly, your cash flow statement shows how money flows in and out of the company, not only operationally, but also through investments and financing.
Monthly evaluation of these documents will help keep your brewery accountable for your financial goals while maintaining a healthy and accurate financial perspective while making critical decisions throughout the year. ●
Insights Accounting is brought to you by Sensiba San Filippo LLP